Are Japanese Eating into Their Savings?

Once some of the world’s biggest savers, Japanese likely dipped into their savings and spent more than they made in the fiscal year through March, the first time Japan’s households have been in the red on an annual basis since World War II.

Economists say that gross domestic product data due Thursday will suggest Japan’s household savings rate – the ratio of savings to disposable income – turned negative in the last fiscal year. (The official household savings rate won’t be available until December.)

That’s because household spending likely jumped 2.4% on year in the period, according to forecasters polled by The Wall Street Journal and the Nikkei, largely due to rush demand ahead of a sales-tax increase that took effect April 1.

That would be the biggest rise in household spending in a fiscal year since 1996. Since disposable income remained flat, economists say, it was likely enough to help push the household saving rate into the red.

A negative savings rate can signal too much borrowing and spending, as it did for the U.S. before the recent financial collapse. Some countries, such as New Zealand, which relies heavily on foreign borrowing, have had negative rates for years without big problems. Economists disagree about the impact.

For Japan, whose economy is emerging from years of stagnation and which has a large public debt load, the trend is worrisome.

There are some positives: one is that individuals are saving less and spending more, underpinning growth.

The International Monetary Fund expects Japan’s economy to grow around 1.4% this year – largely due to an upturn in consumer spending sparked by lower rates and a weak yen. The sales tax hike – a rise to 8% from 5%, brought in to pare huge government debt – risks curtailing local demand.

Teizo Taya, an economist and former member of the Bank of Japan policy board who estimates a negative savings rate of between 0.2 and 0.4% in the last fiscal year, says consumer spending might be strong enough to withstand the sales-tax hike.

“If the decline continues, the current recovery may be able to continue even in the face of the tax hike,” Mr. Taya said.

But there are sizeable risks as consumers become more spendthrift. One is that wages don’t rise concomitantly. That could leave Japanese saddled with debt and crush the newfound optimism.

“It’s not a very good thing for the household savings rate to fall in the red, as it’s a sign that consumers aren’t making enough,” said NLI Research Institute economist Taro Saito, who expects a negative savings rate of 0.4% in the just-ended fiscal year.

Another risk for Japan, where public debt is more than three times annual national output, is that a negative savings rate leaves the economy more dependent on foreign financing. Japan boosters have long argued the country can sustain its large debt, the biggest among industrialized nations, because it can borrow from a large pool of domestic savings. Any change in that is a risk.

Few people expect the household savings rate to stay negative. Mr. Saito says the rate will likely turn positive as the sales-tax increase crimps consumer spending in the second quarter.

Later this year, companies should increase wages as optimism over the economy grows, said Mitsubishi Research Institute chief economist, Yoko Takeda.

“We’re seeing wage increases for the first time in a long time, and many companies will likely increase summer bonuses,” she said. “Firm employment and income conditions should support a rebound in household spending from the summer.”

Still, there are other worrying signs. For years, Japanese were among the world’s biggest savers, putting away 15% of after-tax incomes as the economy boomed in the 1980s. But a slowdown in the 1990s led to a fall in the household-savings rate.

A demographic shift has added to the decline. As its population ages, Japan’s retirees are drawing down savings. The household savings ratio stood at 1.0% at the end of March 2013, down from 11.8% two decades ago, when there were roughly half as many people aged 65 and over.

High corporate savings have helped counterbalance low household saving and sizeable government deficits, meaning Japan has not had to borrow from the rest of the world to fund its large debt.

Things might be changing. The nation recently began running monthly current account deficits, signaling it’s beginning to rely more on overseas financial flows. Its gross savings rate, as a percentage of gross domestic product, fell to 19% in 2012, down from around 30% in the 1980s, and just above the U.S. at 16%. The rate, which is derived by deducting consumption expenditure from GDP, includes personal, business and government savings.

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